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Session 2
World of Retailing & SCM
1-2
What is Retailing?
• Retailing – a set of business activities that adds value to the products and services sold to consumers for their personal or family use.
A retailer is a business that sells products and/or services to consumers for personal or family use.
James Darell/Getty Images
1-3
The Distribution Channel
Distribution ChannelPPT 1-4
1-4
Examples of Retailers
Retailers: Kohl’s, Macy’s, Wendy’s,
Amazon.com, Jiffy Lube, AMC Theaters, American Eagle Outfitter, Kroger
Firms that are retailers and wholesalers that sell to other business as well as consumers:
Office Depot, The Home Depot, United Airlines, Bank of America, Costco
1-5
Manufacturing, Wholesaling and Retailing
Vertical Integration – firm performs more than one set of activities
Ex: retailer invests in wholesaling or manufacturing
Backward Integration – retailer performs some distribution and manufacturing activities
Ex: JCPenney sells Arizona jeans (Private Label)
Forward Integration – manufacturers undertake retailing activities
Ex: Ralph Lauren operates its own stores
1-6
How Retailers Add Value• Break Bulk
-Buy it in quantities customers want• Hold Inventory
-Buy it at a convenient place when you
want it• Provide Assortment
-Buy other products at the same time• Offer Services
-See it before you buy, get credit, layaway
1-7
How Retailers Add Value
The value of the product and service increases as the retailer performs functions.
Bicycle is developed at manufacturer
Bicycle is developed in several styles
Bicycle is offered in convenient locations in quantities of one
Bicycle is featured on floor display
Bicycle can be bought on credit or
put on layaway
1-8
World’s Largest Retailers
1-9
Nature of Retail Industry is Changing
Mom and Pop Store
To Today’s Retailer
1-10
Retailing is a High Tech Industry
• Selling Merchandise over the Internet
• Using Internet to manage supply chains
• Analyze POS data to tailor assortments to stores
• Computer systems for merchandise planning
Ryan McVay/Getty Images
1-11
Globalization of Retailing
Source Merchandise From Around the World
Wal-Mart Operates in U.S., China, Mexico, UK, Germany
Carrefour has Stores in 25 Countries
Don Farrall/Getty Images
1-12
Comparison of Distribution Channels Across the Globe
SCM drives RETAIL1-13
10-14
Retailing Strategy
Retail Market Strategy
Financial Strategy Site Location
SCM &Information Systems
Retail Locations
Customer Relationship Management
Organizational Structure and HR Management
10-15
Supply Chain Management Supply chain management is the delivery of
economic value to customers through management of the flow of physical goods and associated info from vendors to customers
Ryan McVay/Getty Images
10-16
Strategic Importance of Supply Chain Management
• Opportunity to Reduce Costs– Transportation Costs– Inventory Holding Costs
• Provide Value to Customers by Making the Right Merchandise is in the Right Place at the Right Time– Fewer Stockouts– Greater Assortment with Less Inventory
• Improved ROI
10-17
Return on assets = Net profit margin x Asset turnover
Net profit = Net profit x Net sales
Total assets Net sales Total assets
Improve Return on Investment
Efficient Supply Chain Management Higher Asset Turnover
Same Sales Using Less Inventory
10-18
Illustration of Supply Chain
10-19
Benefits of Efficient Supply Chain Management
Fewer stockouts – merchandise will be available when the customer wants them
Tailoring assortments – the right merchandise is available at the right store
Customers respond to the convenience as evidenced by increased sales
Ryan McVay/Getty Images
High Return on Investment
An efficient supply chain can improve a retailer’s ROI
• Increases sales – customers are offered more attractive assortments
• Net profit is improved by increasing gross margin and lowering expenses
• Inventory levels are lower, lower investment and total assets are lower with asset turnover higher
PhotoLink/Getty Images
Wal-Mart’s Sustainable Advantage
Wal-Mart’s success is its information and supply chain management systems. Why are competitor’s lagging behind?
Ryan McVay/Getty Images
The software is unavailable elsewhere and is constantly updated and improved
Wal-Mart made a substantial investment in developing its systems and has the scale economies to justify it.
Minimizing Stockouts
Royalty-Free/CORBIS
Forecast demand accurately
Make sure merchandise in stockrooms is on the shelves
Buyers place orders at the right time with vendors
Stores need to place orders with distribution centers in a timely fashion
Distribution Centers need to send right quantities
Managers need to provide enough lead time for deliveries
10-23
Information and Merchandise Flow
10-24
Information Flow
10-25
Flow of Merchandise
Efficient supply chain would know the customer
Store would advertise to these customers
Buyers would purchase more of this wine
Distribution center would be prepared to distribute the wine
PhotoLink/Getty Images
10-26
Information Flow
2. Information about purchase is transmitted from POS terminal to the buyer/planner
3. Information about purchases are aggregated by buyer/planner and sent to distribution center and vendor to ship merchandise
1. When customer makes apurchase, sales associatescans UPC code or RFID chip on merchandise and customer credit card/loyalty card Steve Cole/Getty Images
StockTrek/Getty Images
10-27
Information Flow
6. Store managers inform distribution center about receipt of merchandise and coordinate deliveries
4. Buyer/planner communicates withvendor and places a purchase orderto re-supply stores.
5. Buyer/planner notifies distributioncenter about incoming orders andhow they are to be distributed to stores
David Buffington/Getty Images
PhotoLink/Getty Images
10-28
Data Warehousing
Data warehousing is the coordinated and periodic copying of data from various sources, both inside and outside the enterprise, into an environment
ready for analytical and informational processing
Wal-Mart makes good use of its data warehouse. It should. Experts estimate that it is second in size only to that of the U.S. government
10-29
Royalty-Free/CORBIS
Electronic Data Interchange
• EDI is the computer-to-computer exchange of business documents between retailers and vendors
• Merchandise sales
• Inventory On Hand
• Orders
• Advanced shipping notices
• Receipt of merchandise
• Invoices for payment
10-30
EDI Security
There are implications of security failures (loss of data, loss of public confidence), but retailers have security policy objectives:
Ryan McVay/Getty Images
Authentication – system assures person on other end of session is who it claims to be
Authorization - that person has permission to carry out request
Integrity – info arriving is the same that was sent
10-31
Benefits of EDI
• Reduces cycle time – inventory turnover is higher
• Improves overall quality of communications through better record-keeping
• Information can be easily analyzed
10-32
Advantages of Using a Distribution Center
• Effects of forecast error for individual stores are minimized
• Enables retailers to carry less merchandise in the store
• Easier to avoid running out of stock• Retail store space is more expensive than space
at the distribution center
Ryan McVay/Getty Images
10-33
Logistics Strategy
Pull Supply ChainMerchandise shipped to stores based on sales and inventory levels in the stores
Push Supply ChainMerchandise shipped to the stores based on forecasted sales rate
(c) Brand X Pictures/PunchStock
10-34
Merchandise Flow
10-35
Activities Performed by Distribution Center
• Managing inbound transportation• Receiving and checking merchandise• Storing or cross docking merchandise• Preparing merchandise for the sales
floor– Ticketing and marking– Putting on hangers
• Shipping merchandise to stores
• Managing outbound transportation Ryan McVay/Getty Images
10-36
Who Can Use DC’s?
• Retailers selling non-perishable merchandise
• Retailers offering merchandise that has highly uncertain demand like apparel
• Retailers selling merchandise that needs to be replenished frequently
• Retailers that carry a large number of items shipped in broken case quantities like drug stores
• Retailers with many outlets
Ryan McVay/Getty Images
10-37
Crossdocking
Merchandise flows directly from the vendor’s trucks through the retailer’s distribution center and is loaded on the trucks going to the retailer’s stores without being stored in the distribution center
Ryan McVay/Getty Images
10-38
Bull-Whip Effect An uncoordinated channel of built up
inventory when retailers and vendors do not coordinate their supply chain activities
10-39
What Causes a Bull-Whip Effect?
• Delays in transmitting orders and receiving merchandise
• Over-reacting to shortage
• Ordering in batches rather than generating a number of small orders
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10-40
Retailers and Vendors Work Together
• Use EDI• Exchange information to reduce need for
backup inventory, improve sales forecasts and production efficiency
• Vendor manage inventory• Collaborative planning, forecasting and
replacement
PhotoDisc/Getty Images
By working together they can reduce the level of inventory in the chain and reduce the number of stockouts.
10-41Initial Efforts at Coordinating
Vendor and Retailer Supply Chain
• Efficient Consumer Response (ECR) – Food Retailing
• Quick Response (QR) - Apparel
10-42
FMCG Goods Manufacturers
• Promotions > Advertising– consumer promotions - coupons– trade deals
• Why?– Short-Term Orientation– Competitive Reaction– Power of Supermarkets
10-43
Efficient Consumer Response
• Trade Promotions ==> Forward Buying ==> Extremely Uneven Production
• Motivation for Packaged Goods Mfrg– Stop Price Promotion, Forward Buying– Level Out Demand
• Motivation for Supermarkets– Rise of Warehouse Clubs/Discount Store
• Use of EDLP Pricing– Need to Become More Efficient– Excessive Inventory - $30 Billion
10-44
Response by Manufacturers
• P&G - Reduce Consumer Promotion
• Increase Advertising– Build Brand Image, Loyalty– Reduce Price Sensitivity
• Every Day Whole Price - No Trade Promotions
10-45Mfg-Distributor/Retailer Fashion, Clothing –
Quick Response Consumer
• Inherently Unpredictable Demand
• Old Solution - Over Buyer and Markdown
• Quick Response– Provide Initial Assortment– Forecast Sales for Intermediate Form– Monitor Early Sales– Make Final Assortment
10-46
Vendors and Retailers Working Together
• Inherent Conflict
• Motivating Collaborative Solutions– Mutual Idiosyncratic Investment –
Credible Commitments – Schilling (NATO Troop)
– Need Safe Guards– Trust vs. Contracts
10-47
Vendor Managed Inventory
10-48
Radio Frequency Identification
Radio Frequency Identification (RFID) allows an object or a person to be identified at a distance using radio waves.
• Reduces warehouse and distribution labor costs• Reduces point of sale labor costs• Inventory savings by reducing inventory errors• Reduces theft – products can be tracked• Reduces out of stock conditions
(c) Digital Vision/PunchStock
10-49
Why the Hesitation with RFID?
• RFID is expensive – the return on investment is low
• It still only makes sense to put tags on pallets, cartons, expensive merchandise or high theft items
• RFID generates more data than what can be currently processed Jeff Maloney/Getty Images